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Should investors continue to hold TCS shares, add on dips?

Should investors continue to hold TCS shares, add on dips?

By Sandeep Singh  Oct 12, 2021 1:41:46 PM IST (Updated)

TCS shares extended losses to hit a more than two-week low on Tuesday, after the IT major's Q2 performance fell short of Steet analysts.

Tata Consultancy Services (TCS) shares extended recent losses to hit a more than two-week low on Tuesday after the IT giant disappointed the Street with its Q2 performance. TCS - the country's largest IT company - kicked off the corporate earnings season last week. Analysts now await more large-cap IT earnings due this week for cues.

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The TCS stock fell another 0.9 percent on Tuesday a day after suffering its worst single-day fall since March 2020. TCS shares hit Rs 3,631.4 on BSE at the lowest level during the day, a level last seen on August 25. 
On Friday, TCS posted a net profit of Rs 9,624 crore over revenue of Rs 46,867 crore for the quarter ended September 30, falling short of analysts' estimates. The profit rose 6.8 percent and revenue 3.2 percent sequentially. It also missed Street estimates on the EBIT and margin fronts. Analysts in a CNBC-TV18 poll had predicted the company to report a quarterly profit of Rs 9,731 crore over revenue of Rs 47,466 crore.
Calling the company's sequential margin expansion "a positive surprise", brokerage ICICI Direct said TCS posted consistent organic revenue growth and industry-leading margins of more than 25 percent. The company has stable management and robust return ratios with a RoCE of 40 percent.
TCS is one of the leading IT service providers with a presence in banking, financial services and insurance (BFSI), communication, manufacturing, retail and hi-tech segments, it said.
Growth story intact
AK Prabhakar, Head of Research at IDBI Capital, remains optimistic about the IT company's "multi-year growth story". Though Tata Consultancy Services' was "slightly disappointing, everything is priced in for the stock", he told CNBCTV18.com. The company's prospects are intact from a long-term view, he said.
Santosh Meena, Head of Research at Swastika Investmart, said TCS has already rallied a lot in the run-up to the earnings, which "only missed elevated expectations".  The overall outlook for TCS as well as the overall industry is bullish, and any meaningful correction in the stock now is a great buying opportunity, he told CNBCTV18.com.
A high attrition rate is only a major concern for the industry which may lead to some margin pressure, he told CNBCTV18.com.
The company's attrition rate at 11.9 percent for the September quarter is the lowest in the industry.
TCS are Infosys are Ventura Securities Head of Research Vinit Bolinjkar's largecap bets from the IT space. He, however, sees limited scope for rerating in IT names as much of the sector's growth expectations for the next 3-5 years are already priced in.
What should investors do?
Prabhakar said TCS shareholders can continue to be invested in TCS from a long-term perspective. "The company is still growing at a CAGR of 15 percent, which means sales and profit should double in five years," he said.
TCS shares have grown by around 3.6 times over the past five years. In the past year alone, the stock has risen 30 percent.
The headline Nifty50 index has risen 50 percent during this period, and the Nifty IT gauge 58.5 percent.
ICICI Direct remains positive on TCS shares. It has retained a 'buy' call on TCS after the earnings announcement, valuing it at Rs 4,530, which is 34 times its price-to-earnings ratio over the FY23E EPS estimate.
The brokerage also likes Infosys, for the IT company's improving revenue growth, narrowing margins in comparison to the industry leader and healthy payouts. It has a 'buy' rating on Infosys for a target price of Rs 1,930.
Technical view
Although the near-term picture does not look great for TCS on the technical charts, long-term investors are advised to stay put, said Sameet Chavan, Chief Analyst-Technical and Derivatives at Angel One.
"Short-term momentum/swing traders may have different plans and there is a possibility of some near-term correction, but the higher degree bull run remains intact," he said.
Swastika's Meena said TCS has slipped below its 50-day moving average  and can decline further towards Rs 3,500, which will be a good entry point to ride the current bull run.
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